Taking One for the Team

Taking One for the Team with QSBS 1202

I have been in the online trading start-up business since 1996.? In 2016, one of our start-ups, TradeKing, had a cash exit when it sold to Ally Financial.? That year I had to write the largest check I have ever written to the U.S. Treasury. ?

Shortly after I wrote the check, I discovered a provision in tax law that was designed to encourage start-up investment. ??It is an old law, pre-1996, which goes under the handle IRC 1202.?

I read up on the 1202 law and found that certain kinds of stock are designated as Qualifying Small Business Stock (“QSBS”).? The key component in this law is that capital gains from the sale of QSBS stock can be largely excluded from taxation.?

Some criteria: (i) stock must be held for more than 5 years (ii) business must be a C-Corp and (ii) program excludes service businesses and service-related real estate such as hotels and restaurants.? On that last point, it specifies excluded examples of service businesses such as doctors, lawyers, architects, athletes, and brokers.?

I consulted an attorney and was told that an online broker was likely to be interpreted by the IRS as a financial-services business.? But why?? Online brokers provide infrastructure on behalf of regulatory agencies and self-directed traders.? They do not provide individual expertise to customers in the form of investment advice.

Long story short, after the IRS has denied my claim for seven years, I am now at the point of filing a claim with the Court of Federal Claims.? My position is simple.? Online brokers are not service businesses.? They are fintech businesses.

In my favor, there are some good articles written on the subject.? This one sums it up. ?The article references IRS guidance letters that favor my position.? I learned, however, that the IRS generally avoids labeling guidance letters as a precedent.

At some point, I will be putting on my “Mr. Smith goes to Washington” hat and arguing my case pro se – meaning on my own.?

To all my online brokerage homies and fellow crypto guys, watch this space.? I’m going in.